Argentina's New Currency Rules Have Backfired Horribly

Cristina Kirchner’s tightening of the rules on currency exchange has backfired horribly, says Buenos Aires resident William McAllister.The scene is a Buenos Aires city-centre side-street. I stand pretending to look in a shop window until I catch the eye of a man loitering in a doorway. He acknowledges me with a wink and I sidle over. We talk without moving our lips.

“How much?”

“Six 30 five.”

“Deal. Give me five hundred.” With shifty glances over the shoulder, I complete the transaction and scurry away. Another day, another hit.

Bizarrely, the prohibited substance we are trading is the US dollar. But how, in the glittering, cosmopolitan capital of a proud and prosperous nation, did it all get so sordid? How did we sink so low?

About this time last year I wrote about the difficulties, between striking staff and road-blocking protesters, of getting a dog called Prince out of Argentina. A year on, Prince has happily made it home to south London, but I’m still here, due mainly to contractual obligations and personal preference, but certainly not because of Cristina Kirchner’s warm encouragement of British cultural exchanges. Over the past year La Presidenta has kept up a steady stream of invective about British imperialism, and you can set your watch by the monthly stick-poking press release about the Falklands, complaining about offenses such as “the nuclearisation of the conflict” when Britain refused to tell her where it was hiding its submarines.

Writing a year ago, I predicted that after October’s presidential election, the country would be in for some turbulent times. Just two weeks after Mrs Kirchner’s resounding electoral success, the future arrived. Before October was even out, the government had introduced tight restrictions on currency exchange.

The new regulations required anyone wanting to change Argentine pesos into another currency to submit an online request for permission to AFIP, the Argentine equivalent of HM Revenue & Customs. To submit the request, however, you first needed to get a PIN from AFIP, either online or in person. Having finally obtained your number, submitted your online request and printed out your permission slip, you could then present it at the bank or official cambio and buy your dollars. Well, that was the theory.

In practice, the result was chaos. The online system quickly folded under the onslaught of applications, while a personal visit to an AFIP district office meant bringing a camp bed and picnic hamper.

The reason for this tidal wave of requests, and indeed for the introduction of the restrictions in the first place, was the ferocious rate of capital flight from the Argentine economy that had started in 2010, when many could already see the writing on the wall. Which brings us to that thumping electoral victory in October.

When Mrs Kirchner first came to power in 2007 she inherited the social reform programme of her predecessor (also her husband), Nestor Kirchner. Hefty tax demands on the country’s wealth base were liberally redistributed to the disadvantaged, but with little investment in longer-term projects that would deal with the causes of poverty.

From the point of view of the middle-classes, the Kirchners were using taxpayers’ money to buy themselves a constituency of dependents that would keep them in power, a tactic vindicated by that 54 per cent majority last October. Anyone with movable assets started shifting them out of her reach by transferring them abroad or converting them into dollars.

In 2010 the flight of capital started gathering speed, totaling $11 billion by the end of the year. In 2011, as the election approached and signs of a probable Kirchner win emerged, this figure more than doubled to $23 billion. Hence the great slamming of the fire exits as soon as her victory was in the bag.

The months since then have seen an almost weekly tightening of restrictions to close any remaining loopholes, to the extent that it has now become almost impossible to buy foreign currency anywhere apart from the black market.

Which is, of course, exactly what the government hoped for, and in that respect at least the policy has been a success. In the first six months of this year dollar flight has been reduced to $3.5 billion. But damming the flood has come at a huge cost to the economy, especially since the currency restrictions were coupled with another set of regulations that effectively imposed a near-total ban on any imported goods.

Apart from the minor inconveniences this has caused to shoppers, such as no longer being able to buy breakfast cereal not composed of shredded carpet, the measure has also backfired on Argentine industry itself because so many of the products manufactured in Argentina still need component parts and raw materials from elsewhere. Hence, for example, the 1,600 workers laid-off from the Renault car plant in Cordoba last June, while the parts they needed to finish the job languished in a container on a Buenos Aires quayside. But you do not need to be an economist to imagine the consequences when a G20 nation suddenly adopts North Korean-style siege-economy tactics, which does make you wonder about the quality of advice the government is getting.

By a strange coincidence, last month saw the judicial indictment for corruption of ex-president Fernando De La Rua, the man who had his hands on the biscuit tin when the economy last went into the abyss in December 2001.

It’s not that significant, but set alongside the downwardly spiraling prospects and the upwardly spiraling inflation (25 per cent), the frantic hunt for hard currency and the bland ministerial assurances that there is nothing to worry about, it is just another little ripple of déjà vu permeating life in Argentina.